How Divorce Affects Your Money

Like death, divorce is a topic most of us would prefer to avoid. While divorce doesn't have the 100% occurrence rate that death does, the statistics are still sobering.

According to a paper published by the CDC on Marriage and Cohabitation in the United States, "The probability that the first marriages of women and men will survive to at least 10 years was 0.64 (or 64%) for women and 0.66 for men in 2002; the remainder of first marriages dissolved through divorce or separation within 10 years."

Put another way, that essentially means the probability of the first marriages ending in divorce prior to the 10-year mark was 36% for women. So if you're married or considering getting married someday, you quite literally can't afford to ignore the possibility that your marriage might not last.

Ignorance Starts Out as Bliss

Despite that, that's exactly what many of us do. We plan our weddings with the utmost care, worrying about relatively meaningless (but fun!) details like what types of flowers would go best with the bridesmaid dresses we've selected.

If someone dares to bring up the idea of a prenup, we bristle indignantly or blow them off -- unless we're very, very wealthy and already used to the idea.

We don't believe in divorce. Our love is so strong, it can withstand anything. Sometimes there's this fleeting, superstitious feeling that by even mentioning the fact that divorce exists, we are inviting it to happen -- so we quickly reassure ourselves and dive back into more pleasant stuff.

And I get all that. Really, I do. We're nesters, and nesting is a huge part of creating a household. And who wants to think about divorce when we're in love and/or not even married yet?

I sure didn't.

But I got divorced after being married for more than 10 years.

And it absolutely had an impact on my money.

Ignoring Divorce Doesn't Make You Divorce-Proof

The fact is, ignoring the possibility of divorce doesn't make you divorce-proof. And if you do end up being in a marriage that ends in divorce, it's a whole lot better to have done some simple things ahead of time that will at least leave you in a better situation than you might have been in otherwise.

Think of it like being on an airplane and learning about what to do in the unlikely event of a water landing. Preparation doesn't hurt, but it sure can help if you do need it!

Major Areas of Impact (And How to Safeguard Against Them)

There are three major areas where divorce can hit you especially hard money-wise if you haven't taken steps to protect yourself and your future. These are:

  • Assets (Including Retirement)
  • Standard of Living
  • Credit

If you've never thought about how to set up your finances to make sure you are protected in the event of divorce, don't worry -- you can still do things to protect yourself even if you're already married.

Your Assets (Including Retirement Funds)

Let's take a look at assets first, because those will likely be the one of the earliest things you'll deal with in the event of divorce.

Assets include everything that's worth something, no matter how little those things may be worth. Even if you rent and have no money at all set aside, you'll still have to divide up household goods so that they can be divided fairly. At a certain point in the process, you may be tempted to just let your ex have it all; either out of frustration, guilt, or just a desire to get the whole horribly emotional process over with. But doing so can be costly.

Even if you're only dividing up household junk, remember that you'll have to pay to replace what you need but no longer have. So sure, let go of the stupid things or the things that don't mean anything to you -- but don't get carried away. Protect yourself by making sure things come out reasonably fair. And if you do have more assets...

Know Your Stuff You should know exactly what your family's assets are -- even if you never get divorced. Make a list of them, together with your partner. After all, what if one of you dies? It's important to know what you've got.

Then make sure both your names are on any joint property. (And by make sure, I mean physically look at the deeds and verify that for a fact.) An estate planning attorney can advise you on the best way to hold property jointly for tax purposes. And yes, of course you trust your spouse. But we've all thought that we did something, only to find out later that we forgot. Your spouse could have made a mistake, or the paperwork could have been filed improperly. Trust, but verify.

If you're holding any property as separate property (such as an inheritance or business) make sure that is clearly indicated too -- and never, ever mingle those funds. You want your property to stay yours. Mingle and that probably won't happen, unless you end up with a very nice ex who either doesn't seek legal advice or ignores it.

Your Standard of Living

One of the most obvious effects of divorce is its impact on your standard of living. According to the National Committee on Pay Equity, women's earnings were 77.4 percent of men's in 2010. Basically, women are typically paid less for the same work. Get divorced, and you have less money -- which means your standard of living absolutely has to drop if you don't want to end up deeply in debt or bankrupt.

What makes the issue even worse for women with children is that they often go from say, living in a two income, 4-person household with $60,000 a year to live on to a one income, 3-person household with $31,000 a year available to make ends meet. In other words, they have less money and it has to stretch further. Yes, you may receive child support, but let's face it, it's rarely going to cover enough of the actual expenses you'll have for your kids -- and that's IF your ex does pay it on time and in full.

The Child Trends Data Bank states that "Among custodial parents with a child support award, the percentage who received full payment of all support owed them in the previous year increased from 37 percent in 1994 to 47 percent in 2007." Get divorced, and you may find yourself driving an old economy car and struggling to scrape by while your ex drives a flashy new car. And did you catch that "among custodial parents with a child support award" bit? It turns out that, according to data in the 2009 report on Custodial Mothers and Fathers and Their Child Support, of the 13.7 million custodial parents in 2008, 46% of custodial parents didn't even have an agreement or court order about child support.

Protecting Yourself If you're happily married, it may seem weird to think about doing things now to protect your standard of living in case of divorce. But several of those are things you should think about doing anyway.

  1. If you're employed, make sure you're paid what you're worth by negotiating a higher salary and asking for raises regularly. Being paid what you're worth will at least give you a better base to start with if you do get divorced, and if you don't, it'll give you and your family more money to work with.

  2. And whether you work for an employer, yourself, or are a stay-at-home mom, make sure that you're aware of exactly what your family's financial situation is. Don't leave handling the money all to your spouse. Of course, one person may be more comfortable handling the money than the other, but even if that's not you, you should be aware of what your family's income, outgo, investments, and assets are. You need to be able to answer questions about your financial situation without having to refer to your spouse -- and that includes things like how much money you've each got socked away for retirement.

If You Do Get Divorced If you do go through the divorce process, the best thing you can do to retain as much of your standard of living as possible is to make sure you get everything you are entitled to.

I will tell you that it's hard to make yourself do that, and that I didn't do a good job of that. If you're like me, you may end up so emotionally exhausted by that point that you just want to get it over with. Whatever is easiest or most expedient ends up being what happens, but that isn't smart. Or you may not want to be seen as "the horrible ex wife" -- but guess what: unless your divorce is very amicable, you're likely to be painted that way no matter what you do. If you have children and you don't feel comfortable getting what you're entitled to for yourself, at least do it for them. There's a difference between being nice and being a doormat. Stand up for yourself.

Keep in mind too that getting your fair share isn't about being mean or a jerk. You shouldn't do that either. (And it'll cost you too, in lawyer's fees, time away from work to make multiple court appearances, and your emotional health.)

Get legal advice so that you know what you're entitled to in your area and in your situation, and then calmly make sure you get it. Be sure to ask about things like retirement funds and pensions -- you may be entitled to a portion of them, and you can get a Qualified Domestic Relations Order to enforce that. You may also be able to stay on your spouse's health insurance plan for a certain length of time, and your children should be able to stay on it just as if you were still married.

You'll notice that it's rarely men who throw up their hands and say "Oh ok fine take it, I don't care." just to make the whole thing go away. (And I'll tell you a little secret: that doesn't really work anyway.) Make sure, also, that you don't end up taking all of the bad stuff along the way. Which brings me to...

Credit

Depending on your financial situation right now, getting divorced could either harm or help your credit.

Let's talk about the less likely scenario first: divorce improving your credit. That situation can arise if your spouse is very irresponsible with money but you're not. In that case, if you get divorced -- AND you take care of preexisting debts (like your mortgage, car payments, and credit card debt) correctly -- your credit will gradually improve post-divorce. That's because your credit score is based on your history with money, which is recorded in your credit report. Recent history generally counts for more than things that happened in the distant past.

And now for the more likely scenario: your credit score could sink like a rock. That can happen for a couple of reasons. First, while your score and your ex's score are not tied together directly, they will both be impacted by the loans that you both share. And while your divorce decree may say that one party or the other is responsible for Debt A or Debt B, the court isn't the party that you signed the credit agreement with. And make no mistake, a credit agreement is a contract. If you both signed it, you're both liable. So if your ex is assigned Debt A by the court and your name is on Debt A too, if it doesn't get paid that reflects badly on you too. The creditor will almost certainly also try to get the money from you if they can't get it from your ex. They don't care that you're divorced.

If your ex is bad with money, consider protecting yourself by taking on more of the debt in exchange for him giving you more of the assets. That way you can control what gets paid, and make sure it gets paid on time. But only do that if you can truly afford to do so. If your name is on the mortgage and your ex will continue to live there afterward, he'll need to refinance before the bank will remove your name from the mortgage. (And vice versa.) Do NOT sign a quit claim deed without having proof that your name has been removed from the mortgage. A quit claim deed is a way of giving up any claim to the property, but it doesn't release you from any responsibility for the mortgage. So you could end up having to pay for something that you don't own. If either of you do refinance to get the other's name off the mortgage, you'll probably have to meet at the mortgage company to have the quit claim deed signed.

Remember

The most important things to remember about divorce are: stay on top of your finances now, and get legal advice to make sure you're not hurting yourself during the process if you do get divorced. Getting legal advice doesn't have to mean that things will turn into some kind of court room drama with dramatic revelations and private eyes; it just means that you'll know what your options are, and how best to protect yourself. And staying on top of your finances is just plain smart no matter what your situation.